Just jumpped into the trading world

Here are six companies that will report earnings this week. Each, in its own way, provides a snapshot of the economy.

— General Electric Co.

— Why it’s important: GE has a stake in almost every major sector of the economy. It builds turbines for power plants and high-tech medical machines. Jetliners use GE engines. When homeowners remodel, GE’s stainless steel ovens and refrigerators anchor their kitchens. And many people still screw GE light bulbs into their living room lamps. GE is also a barometer of the health of the financial world through its lending arm GE Capital.

— When it will report: Friday, April 17.

— What the experts say: The consensus of analysts surveyed by Thomson Reuters is that GE will earn 21 cents per share in the first quarter on sales of $39 billion. That’s down from profit of 43 cents per share on revenue of $42 billion a year ago.

— You’ll know the economy is improving if: GE sells more of its giant energy-generating windmills. That could be a sign that the $787 billion stimulus plan passed by Congress earlier this year, which includes money for alternative energy, is starting to kick in.

— You’ll know the economy is not improving if: GE Capital isn’t making money. Test models developed by the Federal Reserve to help financial companies gauge their health show GE Capital will at best break even this year.

— The quote: “We are in a recession and, at times like these, it is difficult to predict how bad and for how long” GE’s CEO Jeff Immelt said in a recent letter to shareholders.

Intel Corp.

— Why it’s important: Intel is a barometer of spending on personal computers and servers. When computer makers buy more of Intel’s chips, it indicates they believe demand from consumers and businesses is strong. Orders have cratered in recent months. Intel’s profit has plunged to its lowest levels since 2001.

— When it will report: Tuesday, April 14.

— What the experts say: Analysts expect net income of 2 cents per share, down from 25 cents per share a year ago. They expect sales to fall nearly 30 percent to $6.96 billion.

— You’ll know the economy is improving if: They excel in areas other than the Atom, a small chip for mini-laptops called “netbooks,” smart phones and other gadgets. Atom chips are less expensive than the more powerful Intel processors found in full-size computers. Demand for the Atom has been brisk, suggesting people are buying cheaper machines than standard PCs.

— You’ll know the economy is not improving if: The gross profit margin falls below Intel’s forecast for the low 40 percent range. The figure measures the proportion of revenue left over after subtracting the cost of making Intel’s chips and other products. Intel incurs expenses for running its factories at less than full capacity. A low number means Intel factories are even less full than expected and PC demand is humdrum.

— The quote: “If anything, even though things are down, I would think they’re going to be one of the positive spots in the electronics industry,” said Jim McGregor, chief technology strategist for market researcher In-Stat.

Johnson & Johnson

— Why it’s important: J&J is the world’s most diverse health care products company, making everything from contraceptives to baby formula to advanced drugs harvested from living cells. That broad base means it captures a large slice of consumer spending. People are normally reluctant to cut back on health care spending.

— When it will report: Tuesday, April 14

— What the experts say: What the experts say: Analysts expect earnings of $1.22 per share on more than $15.4 billion in revenue, down from $1.26 per share last year on sales of $16.19 billion.

— You’ll know the economy is improving if: Sales of both prescription drugs and consumer goods rise. People worried about losing their job and health insurance cut back on doctor visits, elective surgery and prescription medicines. Investors should consider the demand for consumer goods, not just the revenue.

— You’ll know the economy is not improving if: Sales of prescription drugs continue to fall. That indicates consumers are scrimping on expenses usually seen as crucial. In the fourth quarter, J&J observed consumers were becoming more frugal, and sales of items like contact lenses and diabetes test strips had fallen.

— The quote: “It’s probably going to be a couple more quarters before you see it in their numbers, even if the economy’s already turned,” Gabelli & Co. analyst Jeff Jonas said.

Citigroup Inc.

— Why it’s important: The nation’s largest bank is involved in everything from residential mortgages to commercial real estate to credit cards. Any recovery in Citigroup would bode well for the broader financial industry, and the market knows it: Stocks began a four-week rally after CEO Vikram Pandit said last month that January and February were profitable.

— When it will report: Friday, April 17

— What the experts say: Analysts predict a sixth straight quarterly loss — this time, of 36 cents per share. In the first quarter last year, Citigroup lost $5.1 billion, or $1.02 a share.

— You’ll know the economy is improving if: There is any sign of improvement in credit. It’s a given that Citigroup will see more debtors fail to make their payments; the question is whether the rise in defaulting loans is starting to moderate.

— You’ll know the economy is not improving if: Loan defaults are accelerating at a much faster pace than expected.

— The quote: “Historically, losing money is a bad thing. But now, if you’re losing less money, it’s a good thing,” said Kris Niswander, associate director of financial institutions at SNL Financial. “We’re looking for any glimmer of hope that can be found.”

Sherwin-Williams Co.

— Why it’s important: This paint and wall-covering company gets nearly half its sales from its remodeling and repainting business. Another 10 percent comes from new housing and new building construction. As the economy slowed down — and housing sales and renovations with it — Sherwin’s business contracted sharply.

— When it will report: Thursday, April 16.

— What the experts say: Analysts surveyed by Thomson Reuters expect it to earn 21 cents per share on revenue of $1.62 billion. That’s below last year’s 64 cents per share on revenue of $1.78 billion.

— You’ll know the economy is improving if: Sales of paint for new homes and remodelings rebound, even slightly. That means consumers are more willing to make discretionary purchases.

— You’ll know the economy is not improving if: Sales in outside the U.S., which began sinking at the end of last year, fall more than anticipated. That means the economy could be depressed for longer than expected.

— Quote: “Since they’re heavily tied to things like consumer spending and the repair and remodel market, they’re still definitely going to be pretty pressured through 2009,” said Morningstar analyst Anthony Dayrit.

CSX Corp.

— Why it’s important: The railroad company transports everything from cars and car parts to heating oil. When consumers feel pinched or homes are sitting empty, those things aren’t moving.

— You’ll know the economy is improving if: Shipping volume picks up. Volume tends to improve before the broader economy, as manufacturing lines start moving again. The lead time can be anywhere from a few months to a year.

— You’ll know the economy isn’t improving if: Shipments of core commodities such as lumber and automobiles, chemicals and agricultural products remain sluggish — that means demand is still frozen. The Association of American Railroads said total volume in the first week of the second quarter fell 19.1 percent from a year earlier, comparable with previous weeks this year.

— The quote: “We are modeling for CSX’s volumes to turn positive in the fourth quarter, along with the general economy,” Longbow Research analyst Lee Klaskow said.

Ashley Heher in Chicago, Jordan Robertson in San Francisco, Stephen Manning in Washington, Tom Murphy in Indianapolis and Samantha Bomkamp in New York contributed to this story.

Dream Bailout Has a Dark Side

It will go down as one of the biggest – and most popular — bailouts of the credit crunch. But who will pay for it later?

The Federal Reserve is buying hundreds of billions of dollars of cheap mortgages from Fannie Mae and Freddie Mac. The purchases, which so far amount to $250 billion and could grow to $1.25 trillion, has driven mortgage rates to historical lows, inducing house purchases and sparking a refinancing wave.

This serves key social and political goals: It helps shore up house prices, while the lower rates put extra money into the pockets of people who aren’t struggling to service their mortgages. This makes them less likely to oppose taxpayer funded moves to support homeowners facing foreclosure.

What’s more, banks holding Fannie and Freddie securities get to book big gains as the Fed’s buying spree drives up prices. Analyst Meredith Whitney estimates the top ten banks increased their holdings of securities issued by Fannie and Freddie and other government agencies by $128.6 billion, or 30%, in the fourth quarter. Those will be marked higher in the first quarter.

Most convenient of all: This mortgage buying is being done by the Fed, which doesn’t need approval from Congress for the purchases.

Getty Images

The Federal Reserve has taken dramatic steps to revive the economy and stabilize the financial system.

On paper, it’s a dream bailout. It benefits not just large banks but also ordinary people, it’s hard for politicians to tamper with, and the Fed doesn’t have to borrow money to fund the purchases — it just prints it instead.

When something’s this good to be true, it pays for investors to dig deeper. And the risks abound.

The biggest is that the purchases will deal another blow to the credibility of the Fed, whose monetary policies helped stoke the credit boom.

Of course, printing money carries inflation risk. And the Fed’s aggressive actions mess with market pricing. The mortgage purchases could help increase assets on the Fed’s balance sheet to $3 trillion – equivalent to over 20% of GDP. So when it stops buying, mortgage rates could rise sharply.

The size of the Fed purchases are already overwhelming private markets. Right now, there is limited investor demand for Fannie and Freddie mortgages with coupons under 5% due to the risks of holding such low-yielding paper. Filling that gap, the Fed purchased $192 billion of 4% and 4.5% conforming mortgages, on a gross basis, in the four weeks ending March 25.

Holding this risky paper could damage the Fed later on. If it wants to sell 4% mortgages to private investors, it would likely have to do so at a price that creates a yield above 5% — potentially triggering a loss for the Fed. It could of course choose to hold the mortgages to maturity, with any credit losses covered by Fannie and Freddie. But since the Treasury is committed to backing those two, the taxpayer could yet end up covering additional Fannie and Freddie losses that result from pricing mortgages too low.

The mortgage buying could also alter the Fed’s core mission in a detrimental way. In an unusual joint statement last month, the Fed and Treasury said the Fed’s job was not to “allocate credit to narrowly-defined sectors or classes of borrowers.” Yet focusing so much money on residential mortgages, and thus homeowners, seems to do just that. Investors might come to expect support purchases every time an asset gets into trouble.

Finally, the Fed’s actions may attract Congressional scrutiny. “Everything’s fine as long the Fed is making perfect decisions,” says Rep. Scott Garrett. “The challenge for Congress is: can we do anything to create oversight to address that.”

Exclusive: Big Banks’ Recent Profitability Due to AIG Scam?

March 30, 2009 |

Tyler Durden

Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the phenomenal scam that continues unabated in the financial markets, and now has the full oversight and blessing of the U.S. government, which in turn keeps on duping U.S. taxpayers into believing everything is good.

I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety:

AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria – rated at least AA- (if it fit these criteria all OK – as far as I could tell credit assessment was completely outsourced to the rating agencies).

Main products they took on were always levered credit risk, credit-linked notes (collateral and CDS both had to be at least AA-, no joint probability stuff) and AAA or super senior portfolio swaps. Portfolio swaps were either corporate synthetic CDO or asset backed, effectively sub-prime wraps (as per news stories regarding GS and DB).

Credit linked notes are done through single-name CDS desks and a cash desk (for the note collateral) and the portfolio swaps are done through the correlation desk. These trades were done is almost every jurisdiction – wherever AIG had an office they had IB salespeople covering them.

Correlation desks just back their risk out via the single names desks – the correlation desk manages the delta/gamma according to their correlation model. So correlation desks carry model risk but very little market risk.

I was mostly involved in the corporate synthetic CDO side.

During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent – these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were “we have never done as big or as profitable trades – ever.”

As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks – effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities – run a chart from say last September to current of say S&P 500 and Itraxx – credit has underperformed massively. This is largely due to AIG-FP unwinds.

I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period.

For those to whom this is merely a lot of mumbo-jumbo, let me explain in layman’s terms:

AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this – for lack of a better word – fraudulent scam.

In simple terms, think of it as an auto dealer which knows that U.S. taxpayers will provide an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).

What this all means is that the statements by major banks, i.e. JP Morgan Chase (JPM), Citi (C), and BofA (BAC), regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner’s (and thus the administration’s) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.

For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this “one time profit”, which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers’ money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.

And the conspiracy thickens.

Thanks to an intrepid reader who pointed this out: A month ago, ISDA published an amended close out protocol. This protocol would allow non-market close outs, i.e. CDS trade crosses that were not aligned with market bid/offers

The purpose of the Protocol is to permit parties to agree upfront that in the event of a counterparty default, they will use Close-Out Amount valuation methodology to value trades. Close-Out Amount valuation, which was introduced in the 2002 ISDA Master Agreement, differs from the Market Quotation approach in that it allows participants more flexibility in valuation where market quotations may be difficult to obtain.

Of course, ISDA made it seem that it was doing a favor to industry participants, very likely dictating under the gun:

Industry participants observed the significant benefits of the Close-Out Amount approach following the default of Lehman Brothers. In launching the Close-Out Amount Protocol, ISDA is facilitating amendment of existing 1992 ISDA Master Agreements by replacing Market Quotation and, if elected, Loss with the Close-Out Amount approach.

“This is yet another example of ISDA helping the industry to coalesce around more efficient and effective practices, while maintaining flexibility,”said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. “The Protocol permits parties to value trades in the way that is most appropriate, which greatly enhances smooth functioning of the market in testing circumstances.”

And, lo and behold, on the list of adhering parties, AIG takes front and center stage (together with several other parties that probably deserve the microscope treatment).

So in simple terms, ISDA, which is the only effective supervisor of the Over The Counter CDS market, is giving its blessing for trades to occur (cross) below where there is a realistic market bid, or higher than the offer. In traditional equity markets this is a highly illegal practice. ISDA is allowing retrospective arbitrary trades to have occurred at whatever price any two parties agree on, so long as the very vague necessary and sufficient condition of “market quotations may be difficult to obtain” is met. As anyone who follows CDS trading knows, this can be extrapolated to virtually any specific single-name, index or structured product easily.

In essence, ISDA gave its blessing for below the radar fund transfers of questionable legality. The curious timing of this decision and the alleged abuse of CDS transaction marks by and among AIG and the big banks, is striking to say the least.

This wholesale manipulation of markets, investors and taxpayers has gone on long enough.

Airline executives have little more to go on than a feeling, but based on very preliminary numbers, they’re expecting ticket sales to climb as the summer travel season approaches. That could mean that after several months of fare declines, prices will reverse and begin rising for the summer months as newly confident consumers book summer trips.

From mid-February on, bookings have improved, said Scott Kirby, president of US Airways Group Inc. Sales are still worse than a year ago, “but things seemed to bottom in February, at least in the near term,” Mr. Kirby said. “Hopefully we’ve seen the worst of it.”

Bookings had dried up dramatically in January, prompting carriers to launch massive fare sales, some offering fares as low as $99 to fly across the country with little advance purchase. Last month, average domestic fares were about 8.7% lower than a year earlier, and fares to Europe fell by more than 10%, according to the Air Transport Association.

Airlines also blitzed travelers with special deals on top of low fares, from double and even triple elite-qualifying miles for frequent fliers, to JetBlue’s promise — similar to those made by some car companies — of a full refund if a customer is laid off before a trip.

Those deals appear to have worked, at least somewhat, as carriers report an uptick in domestic bookings for April. While spring break travel was weak, some consumers seem willing to plan trips to see family and friends over the Easter and Passover holidays in April, seeing those travels as more of a necessity than an optional vacation.

“As we get into the holiday periods we are starting to see some traction,” said David Barger, chairman and chief executive of JetBlue Airways Group Inc.

Mr. Barger, like other airline executives, expects full planes this summer. But carriers don’t yet know what kind of pricing power they’ll have in the coming months. It may be planes can only be filled at bargain-basement prices. Or rebounding demand could make seats more precious.

“I think we’re going to see our traditional strong summer traffic,” he says. “The question is going to be, at what price?”

Thousands of passengers pass through the United Airlines hub at Chicago’s O’Hare airport during the busy summer travel season.

Of course, calling a bottom to the recession is risky business at this point. Another unexpected blow or two to consumer confidence, and the downward slide in air travel could resume. If it does, airlines are strangely well-positioned to continue offering lower fares and even eke out small profits this year.

Last summer’s oil-price shock forced airlines to ground so many planes that when demand plunged from business and leisure travelers, airlines had already significantly reduced capacity.

“The fact that many carriers are projecting even the prospect of profits this year says a ton about the extent of the capacity cuts they’ve made and the success of steps they’ve taken in the last 12 months,” said John Heimlich, chief economist for the Air Transport Association.

Just consider baggage fees, which alone may swing some airlines to profitability this year.

At US Airways, baggage fees and other “ancillary revenue” initiatives are expected to amount to an added $400 million to $500 million in extra revenue in 2009 — as much as the company has ever earned in its best year. At UAL Corp.’s United Airlines, total ancillary revenue, mostly “Economy Plus” coach seating and baggage fees, will be $1.2 billion this year. That’s more than United’s cargo division will bring in, and enough to pay more than one-quarter of the company’s payroll.

For many airlines, an uptick in consumer demand is only part of the economic story. Business travel has dropped off sharply, as many corporations restrict travel and reduce business activity — fewer deals to close or projects to launch. In addition, many who are still traveling have traded down, refusing to buy high-dollar first-class or business-class tickets and riding in coach instead.

Read More

International carriers that rely heavily on high-dollar corporate customers are suffering more heavily now than airlines that focus more on domestic travel and low-fare passengers.

“We’ve seen businesses once again, especially big businesses, focus on the travel budget as one of the most visible items in the budget,” said Glenn Tilton, chairman and CEO of UAL and United. “So our big corporate clients are clearly reducing their travel.”

If demand does pick up as some executives are predicting, airlines will enjoy renewed pricing power because of their capacity reductions.

Airline executives note that they do not yet have a good read on summer traffic. Few tickets have been sold for the busiest travel season of the year, airlines say. US Airways says only 20% of its seats have been sold for May, giving the airline only sparse data on what to expect this summer.

But even at the biggest U.S. airlines, there are signs of improving domestic demand, at least in spring.

While economic conditions vary market-to-market, “domestic markets are showing more signs of some sense of economic optimism than foreign markets are,” said Mr. Tilton.

Still, business travelers are not likely to return until the broader economy gains steam, meaning continued pain for many airlines — but cheap tickets for many consumers.

March 30 (Bloomberg) — Four days after U.S. lawmakers berated Financial Accounting Standards Board ChairmanRobert Herz and threatened to take rulemaking out of his hands, FASB proposed an overhaul of fair-value accounting that may improve profits at banks such as Citigroup Inc. by more than 20 percent.

The changes proposed on March 16 to fair-value, also known as mark-to-market accounting, would allow companies to use “significant judgment” in valuing assets and reduce the amount of writedowns they must take on so-called impaired investments, including mortgage-backed securities. A final vote on the resolutions, which would apply to first-quarter financial statements, is scheduled for April 2.

FASB’s acquiescence followed lobbying efforts by the U.S. Chamber of Commerce, the American Bankers Association and companies ranging fromBank of New York Mellon Corp., the world’s largest custodian of financial assets, to community lender Brentwood Bank in Pennsylvania. Former regulators and accounting analysts say the new rules would hurt investors who need more transparency, not less, in financial statements.

Officials at Norwalk, Connecticut-based FASB were under “tremendous pressure” and “more or less eviscerated mark-to- market accounting,” saidRobert Willens, a former managing director at Lehman Brothers Holdings Inc. who runs his own tax and accounting advisory firm in New York. “I’d say there was a pretty close cause and effect.”

Willens, investor-advocate groups including the CFA Institute in Charlottesville, Virginia, and former U.S. Securities and Exchange Commission Chairman Arthur Levitt oppose changes that would enable banks to put off reporting losses.

‘Outrageous Threats’

“What disturbs me most about the FASB action is they appear to be bowing to outrageous threats from members of Congress who are beholden to corporate supporters,” said Levitt, now a senior adviser at buyout firm Carlyle Group and a board member at Bloomberg LP, the parent of Bloomberg News.

FASB spokesman Neal McGarity said the proposal allowing significant judgment was “in the works prior to the Washington hearing and was merely accelerated for the first quarter, instead of the second quarter.” The plan on impaired investments “was an attempt to address an important financial reporting issue that has emerged from the financial crisis,” he said.

Mary Schapiro, sworn in as SEC chairman in January, testified to Congress on March 11 that the agency recommends “more judgment in the application, so that assets are not being written down to fire-sale prices.”

Unrealized Losses

Goldman Sachs Group Inc. investment strategist Abby Joseph Cohen andNouriel Roubini, the New York University professor who predicted last year’s economic crisis, made bearish forecasts last week about the outlook for the banking industry. Cohen says banks aren’t yet “in the clear,” and Roubini expects the government to nationalize more lenders as the economy contracts. The 24-member KBW Bank Index rose 21 percent in March, after slumping 75 percent during the prior 12 months.

By letting banks use internal models instead of market prices and allowing them to take into account the cash flow of securities, FASB’s change could boost bank industry earnings by 20 percent, Willens said. Companies weighed down by mortgage- backed securities, such as New York-based Citigroup, could cut their losses by 50 percent to 70 percent, said Richard Dietrich, an accounting professor at Ohio State University in Columbus.

“This could turn net losses into significant net gains,” Dietrich said. “It may well swing the difference as to whether bank earnings are strong this quarter, or flat to negative.”

‘Unintended Consequences’

Citigroup had $1.6 billion of losses last year for so- called Alt-A mortgages, according to the company’s annual report. That loss would be erased with the new FASB rules, Dietrich said.

Bank of America Corp. in Charlotte, North Carolina, reported “income before income taxes” last year of $4.4 billion. The FASB proposal on impaired securities would increase that figure by about $3.5 billion, or the amount of “other- than-temporary” losses that the company recognized, Dietrich said. The new rule would mean the loss would be stripped out of net income, boosting earnings, though it would still be reported in financial statements.

While helping lenders report higher earnings, FASB’s changes may hurt Treasury Secretary Timothy Geithner’s plan to remove distressed assets from bank balance sheets, Dietrich said. Allowing companies to hold on to assets without writing them down could discourage them from selling the securities, which would work against Treasury’s objective to resuscitate markets, he said.

“It’s one of the unintended consequences of having the FASB bow to political pressure,” Dietrich said.

Bank Lobbying

Fair-value requires companies to set values on most securities each quarter based on market prices. Banks argue that the rule doesn’t make sense when trading has dried up because it forces them to write down assets to less than they’re worth.

Conrad Hewitt, a former chief accountant at the SEC who stepped down in January, said representatives from the ABA, American International Group Inc., Fannie Mae and Freddie Mac all lobbied him over the past two years to suspend the fair- value rule.

Executives “would come to me in the afternoon with the argument, ‘You’ve got to suspend it,’” Hewitt said in a March 25 interview. The SEC, which oversees FASB, would reject their demands, and “the next morning their lobbyists would go to Congress,” he said.

‘Is That Fair?’

AIG’s near-collapse in September prompted a $182.5 billion government rescue of what was once the world’s largest insurer. Earlier that month, the Federal Housing Finance Agency put Fannie Mae and Freddie Mac under its control after the worst housing slump since the Great Depression threatened the survival of the mortgage-finance companies.

Banks and insurers wanted to value securities at prices they bought them for, Hewitt said. His response: “If you carry them at 100 percent of what your purchase price was and they are worth 50 percent, is that fair to the investor?”

Hewitt said nothing the SEC and FASB did curtailed the lobbying by financial companies, including issuing guidelines on how to price assets when no market exists and conducting a congressionally mandated study of fair-value accounting.

“I don’t think there was anything that would have pacified them,” short of a suspension, he said.

Bank of New York

Efforts to change accounting rules continued after the election of PresidentBarack Obama. Bank of New York Chief Executive Officer Robert Kelly spoke with Gary Gensler, a Treasury official during the Clinton administration who was asked by the transition team to evaluate the SEC. Kelly said in an interview that while he opposes suspending mark-to-market accounting, he discussed with Gensler ways to lessen its impact. Gensler, who has since been nominated to chair the Commodity Futures Trading Commission, declined to comment.

Bank of New York would be one of the biggest beneficiaries of FASB’s proposed changes, said Jeff Davis, director of research at Chicago-based brokerage Howe Barnes Hoefer & Arnett. The company’s earnings were reduced by $1.6 billion last year from writedowns for mortgage-backed securities, according to its annual report. The bank, which said it expects to ultimately lose about $535 million on the assets, blamed the disparity on “market illiquidity.”

House Hearing

At a March 12 hearing of a House Financial Services subcommittee, lawmakers showed impatience with FASB.

After hesitating, Herz said he would try to get a new fair- value rule finished within three weeks.

“The financial institutions and their trade groups have been lobbying heavily,” Herz said in an interview after the hearing. “Investors don’t lobby heavily.”

The political action committees of banks including Citigroup, Bank of America, Bank of New York Mellon, Wells Fargo and banking trade groups contributed money to Kanjorski’s re- election campaign last year, according to the Federal Election Commission. Citigroup gave $6,500, Bank of America $7,000, Bank of New York $8,000 and Wells Fargo $13,000.

Three days before the hearing, 31 financial-industry groups sent a letter to committee chairman Barney Frank and Alabama Representative Spencer Bachus, the panel’s ranking Republican, emphasizing “the need to correct the unintended consequences of mark-to-market accounting.” The organizations included the ABA, the National Association of Realtors and the 12 Federal Home Loan banks, the government-chartered cooperatives owned by U.S. financial companies.

The Federal Home Loan Bank of Atlanta, which Kanjorski cited at his hearing as an institution hurt by fair-value accounting, would also stand to gain from FASB’s proposals.

The company, one of 12 regional institutions that provide low-cost financing to 8,000 member banks, absorbed an $87.3 million writedown on three mortgage-backed securities after determining it would not collect all the cash the assets were supposed to generate, according to a November SEC filing.

Under the FASB proposal, the reduction in the bank’s earnings would be much closer to the $44,000 that the company expects to lose, according to Brian Harris, a senior vice president at Moody’s Investors Service in New York.

‘Raging Inferno’

“It potentially moves the accounting closer to where we saw the economics of these transactions,” Harris said in a March 24 interview. “We don’t see a risk to their debt securities.”

Also endorsing the letter was the Pennsylvania Association of Community Bankers. Thomas Bailey, the group’s chairman and CEO of Brentwood Bank in Bethel Park, Pennsylvania, told the subcommittee that using fair-value accounting “in these times, is much like throwing gasoline on a raging inferno.”

March 30 (Bloomberg) — U.S. Treasury Secretary Timothy Geithner said some financial institutions will need substantial government aid, while warning against any attempt to tax investors who join a federal program to buy tainted assets from banks.

“Some banks are going to need some large amounts of assistance,” Geithner said yesterday on the ABC News program “This Week.” The terms of a $500 billion public-private program to aid banks “cannot change” for investors or they’ll lose confidence in the plan, he said on NBC’s “Meet the Press.”

The Obama administration is pursuing the most costly rescue of the U.S. financial system in history while facing taxpayer concerns the aid is bailing out Wall Street firms that took excessive risks. After allocating about 80 percent of $700 billion in aid approved by Congress, administration officials want to keep open the option of seeking more.

Geithner said the Treasury has about $135 billion left in a financial-stability fund while declining to say whether he will request additional money.

“If we get to that point, we’ll go to the Congress and make the strongest case possible and help them understand why this will be cheaper over the long run to move aggressively,” he told ABC News.

Geithner announced this month a plan shore up the nation’s banks with a public-private partnership to finance the purchase of illiquid real-estate assets. The program will ensure banks emerge from the crisis “cleaner” and “stronger,” Geithner told ABC News.

Purchasing Bad Debt

The plan is designed to purchase as much as $500 billion of bad debts and securities from banks, allowing the institutions to remove tainted assets, attract private capital and resume active lending, according to Geithner.

“The great risk is that we do too little rather than too much” to revive credit and stem what economists say may be the worst recession in seven decades, he said.

Banks need to show more willingness to take risks and restore lending to businesses in order for the U.S. economy to recover from the recession, Geithner said.

“To get out of this we need banks to take a chance on businesses, to take risks again,” he said.

Increases in housing purchases and small business lending indicate government aid is reviving markets, he said.

“Where we are acting, we are seeing progress and impact,” Geithner said on NBC yesterday.

Geithner defended the public-private partnership by saying it was better than the alternatives of requiring banks to weather the crisis with limited federal backing or having the government buy the financial institutions’ toxic assets.

Money at Risk

“The investors are taking risk, their money is at risk and at stake,” he said. Allowing investors to leverage their money with government contributions and guarantees “is a relatively conservative structure,” similar to when an individual obtains a mortgage to buy a house, he said.

Geithner’s comments are part of an effort by the Obama administration to leverage public anger over the financial crisis to win support for giving theTreasury sweeping new powers.

The public-private partnership plan has been criticized by Nobel Prize-winning economist Paul Krugman and other analysts as eliminating risk for investors.

Arizona Senator John McCain, the Republican nominee for president last year, said that while he hopes the new plan works, the Treasury’s efforts to bolster the economy have suffered from “a great deal of incoherency for a long time. It seemed like every few days there was a target du jour.”

Questionable Support

Most members of Congress probably wouldn’t support a request for new bailout funds because they aren’t clear about how the government used the $700 billion authorized in the first legislation, McCain said.

“We still don’t have the transparency and oversight,” McCain said on “Meet the Press.” He said his biggest concern is that the cost of stemming the financial crisis will worsen annual deficits projected to exceed $1 trillion for many years.

“What I am most worried about is laying the debt on future generations of Americans,” he said.

When asked on “This Week” whether Treasury had enough resources to provide a similar level of aid to struggling U.S. automakers, Geithner said the administration was “prepared as a government to help that process.”

“We want to have a strong automobile industry,” he said. “We want it to emerge from this period of challenge stronger.”

Stronger Industry

“We’re prepared as a government to help that process if we believe it’s going to provide the basis for a stronger industry in the future that’s not going to rely on government support.”

Separately, Geithner called on Latin American and Caribbean countries to help revive global growth by safeguarding free trade and stimulating their economies through “all available tools.”

The U.S. and other nations “need to affirm our commitment to maintain open policies toward international trade and investment and to avoid protectionist measures that could threaten recovery,” Geithner said yesterday at the Inter- American Development Bank meeting in Medellin, Colombia. He called on “international institutions” to quickly provide aid.

Geithner proposed last week bringing large hedge funds, private-equity firms and derivatives markets under federal supervision for the first time. A new systemic risk regulator would have powers to force companies to boost their capital or curtail borrowing, and officials would get the authority to seize them if they run into trouble.